Guaranteed maximum price for construction contracts

Typically this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.

As a consequence the contractor is likely to tender a higher price. Effectively they price the risks that they are taking on. This may be acceptable to the client if their priority is certainty rather than the lowest possible cost, for example, if the client has fixed funding available that cannot be exceeded.

However, a guaranteed maximum price is not a panacea, and the price is not necessarily fixed. If the client requests ‘extras’, for example, if the scope of the works increases, then the contract must provide for the price to be increased. Similarly, if work is omitted, then the price should be reduced. There is obviously scope here for disagreement about what constitutes a change that should result in a price adjustment, and there is the potential for the contractor to use the valuation of changes to recover costs they have incurred elsewhere. This can cause tension in a form of contract that was selected to provide certainty.

Whilst a simple project on a green field site might be suitable for a guaranteed maximum price, works to existing, older properties, or complex projects with inherent uncertainty (in particular in relation to ground works) might not. To assess these risks, it is important to ensure that proper investigations are undertaken and a fair apportionment of risks made. It is also important to ensure the client’s requirements have been clearly defined to avoid potential dispute about the nature of the works. A guaranteed maximum price is not an excuse to leap into the unknown and hope for the best.

Guaranteed maximum price contracts tend to be either bespoke (on small projects, often written by the contractor, and so potentially including hidden get-out clauses), or modified standard form contracts – which themselves have potential risks. It is important that these contracts have unambiguous wording, particularly where there are pain / gain provisions.